A Review of Passenger Rail Franchising in Britain: 1996/1997–2011/2012
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A Review of Passenger Rail Franchising in Britain: 1996/1997–2011/2012 John Preston Workshop on Tendering Transport Services Madrid, 19 May 2014. Outline Update of a paper in Research in Transportation Economics in 2008. • Brief History of Franchising. • Key Trends. • Key Issues: Competition, Objectives, Overoptimistic bids. • Franchising Futures. • Conclusions 2 A Very Brief History of Rail Franchising in Britain • First phase. 1996/7 – c2000. Associated with OPRAF. 25 TOCs franchised. • Second phase. c2001-2004. Associated with SRA. 9 TOCs (re)-franchised. • Third phase. 2005-12. Associated with DfT. 13 TOCs (re)- franchised. 2012. ‘Failure’ of West Coast Franchise and instigation of the Laidlaw Enquiry and Brown Review. • Fourth phase. 2014- 3 Development of the British Rail Franchises Original Franchise Type Development and Franchisees Present/Future Franchise 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 South West Trains Lon Stagecoach Stagecoach ? South Western Island Line Reg Stagecoach MTL was purchased by Arriva in 2000 Merseyrail Electrics Reg MTLArr iva Serco/Abellio Merseyrail 2008: Laing Rail, owner of M40, was purchased by DB Regio. 2011: Re‐organisation to Arriva UK. Chiltern Railways Lon M40 Trains M40 Trains DB Regio Arriva Chiltern Railways Connex South Eastern Lon Connex (Veolia) SRA Govia ? Integrated Kent New name: Northern Spirit MTL was purchased by Arriva in 2000 Franchise Regional Railways North East Reg MTLArr iva Serco/Abellio ? Northern North Western Reg First Serco/Abellio ? TransPennine New name: Wales & Borders Cardiff Railways Reg PrismNational Express Arriva ? Wales and Borders Prism was purchased by National Express in 2000 New name: Wessex Trains Wales & West Reg Prism National Express Great Western IC First First ? Greater Western Thames Trains Lon Go‐Ahead First Midland Main Line IC National Express Stagecoach ? East Midlands Some services to Central Trains Reg National Express New Cross Country New name: West Midlands North London / Silverlink Lon National Express Govia ? London Midland Some services went to ‘London Overground‘ franchise in 2007 New name: New Cross Country Cross Country IC Virgin Arriva ? New Cross Country West Coast Trains IC Virgin ? West Coast Scotrail Reg National Express First ? ScotRail Prism was purchased by National Express in 2000 New name: Essex Thameside LTS Rail Lon Prism National Express / c2c ? c2c/Essex Thameside Great North Eastern IC Sea Containers NEX East Coast ? East Coast GB Railways was purchased by First in 2003 Anglia Reg GB Railways Brand name ‘One’ New name: Greater Anglia Great Eastern Lon First National Express Abellio ? Greater Anglia Prism was purchased by National Express in 2000 West Anglia Great Northern Lon Prism National Express Thameslink, Southern Thameslink Lon Govia First ? and Great Northern Gatwick Express Reg National Express New name: Southern Publicly operated Connex (Veolia) Govia Govia Connex South Central Lon Re‐Negotiation / Cost‐plus contract Regional Long Distance London & South East 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Start of franchise contract Source: Schneider, 2013, after DfT 2013, Knowles 2004, Müller 2011, Nash/Smith 2007 British Rail Regulation 1993 ‐ Franchise rounds I II III IV 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 OPRAF SRA Department for Transport DfT Franchising Act Act Office of Strategic Rail Passenger Rail Franchising Authority Railways Welsh Assembly Transport Transport for London Government Railways Act 1993 Regulation of fare levels 2000 Transport Scotland Merseyside PTE 2005 Shadow‐SRA SSRA Regionalised responsibility for some franchises Strategic planning Network Rail Railtrack ‐ Department for Act Public Members Transport facto placed into De Infrastructure manager alisation administration Renation Railways Privatised 1993 Office of Rail Regulation ORR Safety Regulation Rail Safety and Standards Board RSSB (since 2003) at Health and Safety Executive Act etc. and 1974 Work Safety Health Her Majesty's Railway Inspectorate Her Majesty's Railway Inspectorate Safety Inspectorate Act Office of the Rail Regulator Railways Transport Competition Act Monopoly regulation OFT 1993 Office of the International Rail Regulator Safety Commission Railways Office of Fair Trading and OIRR 2003 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 ‘Moderation of Competition’ stages Open Access restricted to Open Access restricted to Case‐by‐case approach. Generally origin‐destination‐pairs 20% of a franchisee’s speaking: Open access services have to that constitute less than registered revenue flows demonstrate that they are not primarily 0.2% of a franchisee‘s – unregistered flows open abstractive but generative. It seems as if revenue for competition. the relevant threshold is that not more than 30% of the traffic is abstractive. Source: Schneider, 2013, after Knowles 2004, Müller 2011, Nash/Smith 2007, Nash/Smith 2011, Preston 2008 Trends: Passenger Kms 55 50 45 40 35 30 25 Passenger20 Kms 15 10 5 0 1981 1983 Data from ORR National Rail Tren 1985/6 1987/8 1989/90 1991/2 1993/4 1995/6 1997/8 ds http://dataportal.orr.gov.uk/Year 1999/0 2001/2 Passenger Kms (Billion Kms) 2003/4 2005/6 1995/6 – 00/1 +27% 2007/8 2001/2 – 04/5 +9% 2009/10 2005/6 Total +84% – 11/12 +33% Trends: Train Kms 600 500 s 400 300 Train Km 200 100 0 1981 1984 1987/8 1990/1 1993/4 1996/7 Year 1999/0 2002/3 Train Kms (Millions) 2005/6 2008/9 1995/6 – 00/1 +21% 2000/1 – 04/5 +7% 2005/6 – 11/12 +13% Total +46% Trends: Unit Costs Source: Robins, 2012. Unit costs in £ per train km, 2008 prices. Main growth in Renewals and Enhancements, but also increases in TOC costs since 2000. 9 Trends: Government Support 1995/6 – 00/1 -44% 2001/2 – 04/5 +150% 2005/6 – 11/12 -24% Total +6% 10 Estimated Welfare Effects (£ B) Overall Increase in Net Effect Infrastructure Costs 1995/6 -2.2 +4.6 +2.4 – 2000/1 2001/2 -18.7 +16.9 -1.8 – 2004/5 2005/6 -13.8 +17.0 +3.2 – 2008/9 Total -34.7 +38.5 +3.8 Based on Robins (2012) and Preston and Robins (2013). If each franchise had bidding costs of £22.5M then the net benefits of £3.8B are offset by transaction costs of £1.1B. 11 Issue (I) Level of Competition and the Winning Bid Franchising has been competitive, but competition declining over time: • First phase: 5.4 bids per franchise • Second phase: 4.2 bids per franchise • Third phase: 3.8 bids per franchise. Current pool of 10 active bidders. High bidding costs (£5M per bidder in 2006, £10M in 2012). Are rail franchises a common value or a private value auction? Assuming no uncertainty and/or no risk aversion contracting- out will ensure optimal effort. But where there is uncertainty (e.g. open access) and risk aversion, effort will be sub-optimal.12 Issue (I) Level of Competition and the Winning Bid Only 3 out of 47 franchises have failed. However, 13 franchises re- negotiated after Hatfield 2000. Evidence of the winner’s curse? 13 Issue (II) Objectives What is franchising trying to achieve? (i) To harness private sector commercial judgement and innovation to reduce the net cost and increase the value for money achieved from the Government’s overall support for passenger rail services. (ii) To improve passenger services, commensurate with funding available. (iii) To set the level of service needed and to vary specifications to reflect changing market needs and accommodate future passenger growth. (iv) To protect passengers from the power of unregulated monopolies. (v) To maximise the benefits of the network as a whole. (vi) To fit rail within Government’s wider public transport objectives. Maximise net social benefit subject to a budget 14 constraint? Issue (II) Objectives Brown Review: (i) Ensure value for money by competition for the market. (ii) Harness private sector skills and innovation. (iii) Ensure stability of service. (iv) Secure franchisees who will work in partnership. (v) Facilitate further devolution of decision making. (vi) Ensure services are delivered and managed by organisations which are attuned to local market needs. 15 Issue (II) Objectives (continued) Change in: Fares Train Miles Subsidy Welfare Profit Max - +17% -8% -7% -22% 50% variable Constrained -1% +8% 0 0 Welfare Max - 50% variable Unconstrained -93% +71% +521% +86% Welfare Max - 50% variable Profit Max - +24% -47% -89% -35% 100% variable Constrained -36% -30% 0 +25% Welfare Max - 100% variable Unconstrained -88% +12% +374% +53% Welfare Max - 100% variable BCR of revenue support (£1.2 b per year) ≈ 4. BCR of revenue and direct support (£4.6b per year) ≈ 1.1 16 Issue (II) Objectives (cont.) Social v Commercial 2012-13 subsidy per passenger kilometre (pence) source: ORR data portal (northern/tpe adjusted for net subsidy) 15,0 12,0 9,0 6,0 3,0 pence per km 0,0 -3,0 -6,0 Issue (III) Overoptimistic Bids The East Coast Franchise Date Started Expected PVNP PVNP Duration 1st year Final year (£m) (£m) GNER April 1996 7 years 651 0 GNER May 2005 10 years (50) (219) National Dec. 2007 7 ¼ years 7 (311) Comparison of FWC Express (purple) and NXEC (red) PVNP = Present Value of Net Payments. Figures in brackets bids. denote premia paid. Source: Modern 1Out-turn. Railways, 2012. Source: Preston and Root (1999) and www.dft.gov.uk 18 Issue (III) Overoptimistic Bids £200 £100 South Eastern South Western First Greater